The Relative Purchasing Power Parity Theory Postulates That

question 22

Multiple Choice

The relative purchasing power parity theory postulates that:

• A) The equilibrium exchange rate is equal to the ratio of the price level in the two nations
• B) the change in the exchange rate over a period of time should be proportional to the relative change in the price level in the two nations over the same time period
• C) the change in the exchange rate over a period of time should be proportional to the absolute change in the price level in the two nations over the same time period
• D) the exchange rate at a period of time should be proportional to the relative prices in the two nations

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Definitions:

Market Demand

The aggregate amount of a product or service that every consumer in a market is prepared and capable of buying at different price levels.

Long-Run Equilibrium

A state in which all factors of production and costs are variable, allowing firms to make adjustments and the market to stabilize at a point where supply equals demand.

Monopolistic Competitor

A firm in a market structure where many companies sell products that are similar but not identical.

Short Run

A period of time in economics during which at least one input is fixed and cannot be changed by businesses.